The 1-2-3 method is a trading strategy that is used across nearly every investment market there is. Futures traders use it, stock traders use it, and now, forex trading is benefitting from this particular strategy. When it’s used correctly, this method offers traders the ability to predict entry levels with a great deal of accuracy.

The Bottom Line

Most often, when searching for how the 1-2-3 method works, investors are simply shown a few candlestick graphs with certain points circled for emphasis. That might work for some visually-minded investors, but others may not understand the point of the strategy simply by looking at a chart, so here it is:

The point, or bottom line, of 1-2-3 trading is to predict the end of a prevailing trend.

That’s it. You’re simply using data to get a clue as to when a trend is headed for a reversal. This is very well suited to the Forex market, because there are trends for the same assets across a variety of time frames, all of which can be analyzed and exploited to make the best trades possible.

Example: Down to Up

Let’s say you’re watching a downtrend in a particular currency’s value. First you need the most recent low, and the most recent high. Now, if the downtrend were to continue steadily along it’s downward path, the next high after the most recent low would be lower than the most recent previous high.

So, if you see that the next high is higher than the most recent previous high, that is your first hint that the downtrend is ending. This where the name “1-2-3 method” comes from in forex trading. The strategy is named for the three data points you need to get a hint that the trend is trading: the recent low, the recent high, and the next high.

In order to trade wisely, the next thing you need is confirmation. Watch for the next low: if the next low is lower than that most recent low you started with, the trend is likely continuing, and you just witnessed a little bump. However, if the next low is higher than your original recent low, you’re looking at a confirmed trend change.

Now What?

Once you’ve confirmed that a trend has changed, you still want to be sure you’re trading safely. The best thing to do is wait for the next high after your confirming low; if that high closes at a price greater than the third point in your 1-2-3 method, you’ve got a winner. Most forex traders would utilize the strategy now to trade long.

The 1-2-3 method can be used in reverse for uptrends. Simply watch for an overall downward pattern with the three data points. As traders get more and more comfortable with the market, they can eventually begin using this forex trading strategy to get in the door even sooner, which means their profit margins can be even higher.

Choosing the best strategy for trading can pay off big time with a little practice. Of course, no forex trading strategy works all of the time. The forex market is often considered one of the most volatile, so predicting trends isn’t always an exact science. But as far as methods go, this one has withstood the test of time throughout almost every trading industry, making it a go-to for most traders.